Gold rose 1 per cent in Europe on Monday, recovering some of last week's losses, as lower prices tempted buyers back to the market amid lingering concerns over the fiscal health of the euro zone.
Stock markets slipped and the euro extended losses after the Spanish central bank's takeover of a savings bank underlined structural problems facing fiscally fragile euro zone states.
Spot gold was bid at $1,186.25 an ounce at 1346 GMT, against $1,175.15 late in New York on Friday. U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange rose $11.50 to $1,187.70 an ounce.
The euro fell 1.6 per cent against the dollar as investors cut risk in their portfolios after news the Bank of Spain was taking control of savings bank CajaSur.
A stronger dollar usually weighs on gold, but the traditionally strong inverse link between the two assets has weakened as both are benefiting from risk aversion.
"What we're seeing now is the crisis is affecting Europe, not the U.S., so the safe haven currency is still being seen as the dollar," said Colin O'Shea, head of Hermes Commodities.
"But now, there are two safe-haven currencies in the global economy and that's gold and the dollar."
The Bank of Spain said on Saturday it had taken over the running of Spanish savings bank CajaSur after its planned merger with another regional lender failed.
The move highlighted the weakness of the banking sectors of some euro zone members, which are already suffering from fiscal problems and struggling to bring down their budget deficits.
Holdings of the main gold exchange-traded fund, the SPDR Gold Trust , remain at record levels, fuelling expectations investors are buying the metal as a long-term haven from risk.
ETF HOLDINGS NEAR RECORD
Euro-priced gold also rose 2.8 per cent on Monday after tumbling 6 per cent last week, despite hitting a record high at $1,012.81 euros an ounce on May 17.
"While Greece did trigger the EU/IMF rescue, we believe this is just the beginning of a new chapter in Greek tragedy with the contagion risk well intact," said Bradley Yim, senior research analyst at Castlestone Management in a note.
"In our view, gold will continue to benefit from the combination of reaching a new high in euro terms, sliding global equities, the situation in Greece, the ECB's reluctance to buy Greek bonds, and soaring demand for gold bars."
While ETF holdings are near record levels, high prices have hurt jewellery demand.
Italian precious metal jewellery imports are thought to have declined 5 per cent year on year in volume terms in the first two months of 2010, though they have risen 9 per cent in the same period in value, the president of the Fiera di Vicenza jewellery trade show said on Saturday.
Other precious metals also recovered after last week's hefty falls. Palladium, which tumbled as much as 25 per cent last week from the previous Friday's close to its lowest level since early February, climbed 4.5 per cent in early trade.
Palladium was later at $444.50 versus $433.50, off a high of $453, and platinum at $1,517.50 versus $1,504.50.
UBS analyst Edel Tully said in a note that a report released by the U.S. Commodity Futures Trading Commission showed a sharp drop in interest in palladium in New York last week.
"Palladium was the heavy loser in the pack, with the NYMEX book falling 8.7 per cent or 160,000 ounces. This represented the biggest one week percentage decline since the week of Sept 29 last year," she said.
Silver was bid at $17.76 an ounce against $17.59.